Early yesterday we reported on the problems California food and grocery industry retailing veteran Harley DeLano is having with his DeLano's IGA Markets chain, which he co-owns with his son Dennis. The DeLano's operate seven stores in Northern California using the IGA banner - three units in San Francisco, three in nearby Marin County and one market in Davis, California, which opened in September 2009 and is the independent grocer's newest store. Davis, which is near Sacramento and home to the University of California at Davis, is a 73-mile drive from San Francisco.

We've now learned additional information about the impending store closures thanks to information made public by Joseph Neri, the attorney for Delano Retail Partners LLC, which is the corporate entity for the DeLano's and their privately-held grocery chain, and other sources.

According to Neri, Delano Retail Partners LLC is closing five of its six stores in the San Francisco Bay Area. He says the stores will be closed by December 17.

The one Bay Area store that will remain open (at least for now) is in Fairfax, in Marin County. The store in Davis, California will also remain open, according to our sources.

Here are the details, according to attorney Neri, along with further information we've obtained from other sources:

DeLano Retail Partners LLC subleases the five stores to be closed in San Francisco and Marin County from Ralphs Grocery Co. of Ohio, which is an entity set up by Kroger Co., which owns Southern California-based Ralphs Supermarkets.

Ralphs Grocery Co. has evicted the grocer from the five stores. Last week Ralphs filed lawsuits in San Francisco and Marin County Superior Courts against DeLano Retail Partners LLC for failure to pay rent on the five units, according to Neri. The amount Ralphs is asking the courts to order DeLano Retail Partners LLC to pay in back rent is well over $1 million, according to court records.

DeLano Retail Partners doesn't have the cash to pay the back rent, or for that matter to keep current going forward. Therefore Harley DeLano and his son Dennis decided to close the five stores.

According to Neri, DeLano Retail Partners LLC plans to turn over the five stores to Ralphs Grocery Co. of Ohio by December 17, a little over two weeks from today. As we reported yesterday, product in the stores is being sold out. The grocer is discounting remaining products in all of the five stores to be closed.

Ralphs Grocery Co. isn't the landlord for the DeLano's Hometown IGA Markets entity, which includes Fairfax IGA, in Marin County's Fairfax, and Westlake IGA Market, in Davis. No eviction notices have been filed for the two stores as of today.

In yesterday's story we mentioned that Marin County-based multi-store independent grocer Mollie Stone's Market's is interested in one or more of the five closing DeLano IGA Markets stores.

First, because the DeLano's are closing the five stores by December 17 due to eviction and related financial difficulties, Mollie Stone's won't be acquiring any of the markets directly from the grocer. However, according to our information, Mollie Stones is interested in at least two or three of the sites, which once vacant will be back on the market, since Ralphs' has no plans to locate stores at the locations.

Kroger Co.-owned Ralphs Grocery Co., which is based in Southern California, has sold or closed all of its Ralphs banner supermarkets and Cala Foods/Bell Markets banner stores in Northern California, accept for one remaining Cala Foods unit in San Francisco's Nob Hill neighborhood, which is slated to close either at the end of this year or sometime in 2011. Instead it operates the Foods Co discount warehouse chain in Northern California and the Bay Area region, which is the format Kroger/Ralphs is focusing on in the market. [See - July 22, 2010: 'The Insider' - After Four Years in the High Weeds in Northern & Central California, Kroger Co. is Emerging to Grow its Foods Co Chain.]

A (potential) Fresh & Easy opportunity

One of the stores that Tesco's Fresh & Easy Neighborhood Market plans to open early next year in Northern California is not far from the Outer Richmond District Delano's IGA Market unit, at 6333 Geary Boulevard, that will soon be closed. The Fresh & Easy store, which is at 32nd Avenue & Clement Street in the Outer Richmond, should benefit from the closing of the DeLano's market because there isn't another grocery store in the immediate portion of the neighborhood.

Tesco's Fresh & Easy would be wise to take a serious look at all five of the closing DeLano's IGA Markets stores, particularly the two units in Marin County (Mill Valley and Tiburon), where Fresh & Easy Neighborhood Market doesn't currently have any planned locations.

The 18th Street store in San Francisco's Castro District, which is a space of no more than 10,000 square-feet, is also a location Tesco's Fresh & Easy should look very closely at trying to acquire. We suspect a number of grocers will be looking at the location.

The Castro District ranks high for sales of natural, organic, fresh-prepared and specialty foods, for example. Both Whole Foods Market and Trader Joe's have plans to open stores in the Castro in 2011. Whole Foods' approval looks solid. Trader Joe's is having some problems in terms of getting its store site in the neighborhood approved.

The other two closing DeLano's stores, the Geary Boulevard unit in San Francisco's Outer Richmond District mentioned previously and the Mission District store on South Van Ness, offer less potential for Fresh & Easy in our analysis, although we would take a close look at both, just not as close as the others.

The Geary Boulevard DeLano's IGA Market location in San Francisco's Outer Richmond District is likely too close in proximity to the 32nd Avenue & Clement Street Fresh & Easy store opening early next year for both stores to do well, in our analysis. One store would probably cannibalize sales of the other, which is something that's been happening with some of the Fresh & Easy stores that are located too close to each other in Southern California, Arizona and Nevada.

The Mission District Delano's store offers some potential for Tesco's Fresh & Easy. However, based on a number of factors, it's our analysis the location would be a real uphill struggle for the Fresh & Easy format.

A second multi-store independent grocer in the San Francisco Bay Area, Marin County-based Delano's IGA Markets (Delano Retail Partners LLC), is on the verge of going out of business, Fresh & Easy Buzz has learned.

The DeLano's problems come just a couple months after one of the oldest multi-store independent grocers in the Bay Area, PW Markets which was founded in the 1940's by the late Joey Franco, closed its doors, sighting competitive pressures in a tough economy as the reason for going out of business. PW Markets, which until a few years ago operated 11 stores in the Bay Area, continued to be run by members of the Franco family until calling it quits this summer.

DeLano's IGA Markets, which operates six stores in San Francisco and nearby Marin County, is majority owned by grocery retailing veteran Harley Delano, who was president of Kroger Co.-owned Cala Foods/Bell Markets from 1990 to 1999, and his son Dennis, who's logged three decades in the food and grocery retailing industry.

Harley Delano, the chairman and CEO of DeLano IGA Markets, retired from his position at Cala/Bell in 1999/2000. The senior DeLano, who's in his early 70's, has over a half century of experience as a grocer, most of it in California.

The DeLano's also own and operate a seventh store in Davis, California, near Sacramento. The Davis store, Westlake IGA Market, which is the grocer's newest unit and was opened in September 2009, and a store in the Marin County city of Fairfax, Fairfax IGA, operate under the "Hometown IGA" rather than "DeLano's IGA" banner.

The Davis store is located in the Westlake Plaza shopping center in the western part of the city, which is home to the University of California at Davis. It's a small-format (11,000 square-foot) neighborhood grocery store. A local group called Davis Advocates for Neighborhood Groceries spent at least three years trying to find a grocer to go in the location. Among the retailers that considered putting a store at the site was Tesco's Fresh & Easy Neighborhood Market, which looked closely at the location in 2007 but decided against it.

In 2006 the DeLano's bought eight Cala Foods and Bell Market stores in San Francisco and Marin County from Kroger Co., which formed the basis of the DeLano IGA Markets chain. Having run the chain just a few years earlier before retiring in 2000, DeLano knew the stores well.

Since then Kroger has either closed or sold all of its remaining Cala Foods and Bell Markets stores, which numbered over 20, in the Bay Area, except for a single unit on Hyde Street in San Francisco. That store is slated to close either at the end of this year or sometime in 2011. Cala/Bell was a long time privately-held grocery chain in the Bay Area. Kroger acquired it in the 1980's.

The DeLano's have sold two of the original eight stores aquired from Kroger in 2006.

Here's what we know about DeLano IGA Market's troubles:

>Two stores to close any day now: The DeLano's have told employees at two of the San Francisco stores, 27th Avenue and Geary in the Richmond District and 18th Street in the Castro District, that the stores will be closed soon. An employee at one of the stores, who's a Fresh & Easy Buzz reader, says inventory in the stores is not being replenished and store hours have been reduced. He said the word is the doors will be closed once all of the existing inventory is sold. He said the closures could come as early as next week.

>Sale or Bankruptcy: Sources tell us DeLano IGA Market's problem's goes far beyond the closing of the two San Francisco stores. The sources say the grocer has been dealing with serious financial difficulty since at least mid-2009. DeLano's IGA Markets closed a store in the Marin County city of Tiburon in December of last year, for example. It's second since buying the eight stores from Kroger Co. on 2006.

We're told DeLano's is looking at two options. First, its hoping to sell the chain, or at least a few of the stores, to another grocer. Our sources tell us the DeLano family is in discussions with the owners of multi-store independent grocer Mollie Stone's Markets, which is based in Marin County, about acquiring some of the stores. Mollie Stone's has eight stores.

Based on demographics - Mollie Stone's Markets operates upscale, specialty-oriented grocery stores - in our analysis the grocer would be interested in just a couple to a few of the Bay Area stores, specifically the units in Mill Valley (pictured at top) and in the Castro District (4201 18th Street) in San Francisco, and perhaps the Fairfax unit. The demographics of the Davis store are fairly strong for the Mollie Stone format. But the grocer doesn't operate any stores outside the Bay Area, although that doesn't mean it might not be interested in doing so if the opportunity and deal were right. Davis is about 90 minutes from the grocer's headquarters in Mill Valley.

The second option would be for the DeLano's to file bankruptcy. It's unclear though, according to our sources, if the grocer has the cash on hand, or would have access to enough capital, to file for a Chapter 11 proceeding, which would allow it to reorganize operations and keep some of the stores in operation. The alternative would be a filing in which the grocer closes all the stores and goes out of business, and its assets are liquidated to pay off some or all of its creditors. The latter is the most probable filing, according to our sources.

>More Store Closures: Inventory levels in a number of the other DeLano IGA Markets, besides the two we report are closing, is low as of yesterday. According to our sources, many of the stores have abnormal out-of-stocks, particularly in the fresh and perishable foods categories. This development lends further evidence that the entire chain is in trouble and is headed for closure - or some form of limited acquisition.

>Website Down: The DeLano's IGA Markets website (delanomarkets.com) has been down (as in taken down) since at least yesterday, to our knowledge, and perhaps longer than that. The prolonged duration of having the website down, which has been a reliable one in the past in our experience, taken with the other information we are reporting, suggests something more than the closure of just two stores is going out with the grocer.

Interestingly, the website for the Davis and Fairfax stores, which are under the Hometown IGA rather than DeLano's IGA banner and have a separate online site, remains up. We're told by sources that the DeLano's own the Davis and Fairfax stores under a different corporate structure (not under Delano Retail Partners LLC), which might explain why one website is down and the other remains up. However, we haven't been able to verify that information as of yet.

>Bottom Line: Based on the information we presently have, it looks like DeLano IGA Markets will soon be out of business, or at a minimum shrunk considerably in size. Some of the stores could be bought by Mollie Stone.

The six DeLano's stores in San Francisco and Marin County that fly the IGA banner are smaller-format conventional supermarkets. The markets range in size from slightly under 10,000 square-feet to slighty over 20,000 square-feet.

The six stores are merchandised based to a certain extent on neighborhood demographics. For example, the stores on Mission Street and West Van Ness in San Francisco have expanded offerings of Hispanic foods because of the high percentage of Latino consumers who live in the neighborhoods. In contrast, the store in Marin County's Mill Valley (pictured at top) has expanded selections of organic and specialty foods because the area's high-income and highly educated residents are big consumers of such products. For example, Whole Foods Market has two stores in Mill Valley, which has a population of just 14,000. The stores do draw shoppers from nearby communties though.

As a price-competitive strategy, Delano's IGA Markets has been doing double couponing in the stores, which is something Harley Delano picked up from his years at Ralphs, which used the promotional vehicle for decades in Southern California until ending it some years ago. Under the ongoing promotion, the stores double the face value of each manufacturers' cents-off coupon (a 50 cent coupon gets a $1 discount) submitted by customers at checkout.

Independents under pressure

The closure of PW Markets a couple months ago, along with the current problems facing Delano's IGA, point up the growing competitive food and grocery retailing market in Northern California and the San Francisco Bay Area specifically.

For example, as as we've been reporting on and writing about since April of this year in our 'Northern California Market Region Special Report' series (see the linked stories at the end of this piece), a number of new grocery chains are entering the San Francisco Bay Area.

Numerous key multi-store independent grocers, such as Mollie Stone's Markets, Lunardi's, Andronico's, Zanotto's, Draeger's and others continue to survive, although none have been thriving over the last few years, in the San Francisco Bay Area despite the increased chain competition and difficulty gaining access to capital because of the ongoing credit and lending crisis, which has hurt many privately-held independents that previously had ready-access to lines of credit but who have found that access seriously limited since 2008. But the increased chain competition and persisting credit market challenges, along with the fact many more shoppers in the region are today focused on price than was the case only a couple years ago, will make it more difficult for these and other independents - which have in significant measure been the innovators and trend-setters in the San Francisco Bay Area - in the year ahead.

The five future stores are in addition to the 19 units in the Sacramento/Vacaville region Fresh & Easy Neighborhood Market confirmed/announced in February 2008 it plans to open, along with any other locations we've identified but that haven't been confirmed by the grocer. See our Northern California Fresh & Easy Store List for details.

Three of the future Fresh & Easy store locations are in the suburban Sacramento cities of Carmichael, North Highlands and Gold River. All three of the cities are in Sacramento County.

Fresh & Easy Neighborhood Market has been issued and has applications pending (depending on the particular store site) for off-sale beer and wine licenses for the five locations, according to records on file with the California Alcoholic Beverage Control (ABC) Department.

In addition, Fresh & Easy Buzz has verified the existence of the five planned future Fresh & Easy store locations using additional, multiple means and sources, including public documents and discussions with commercial real estate and other sources in the region.

None of the Sacramento metropolitan area-proper locations are currently included in the first batch of Fresh & Easy stores set to open in the first quarter of 2011. However, one of the two planned Vacaville stores, the unit at Elmira Road & Nut Tree Road, is on the list. Vacaville is about 41 miles from Sacramento. It's nearly midway between Sacramento and the Bay Area.

Editor's Note - Fresh & Easy Buzz has identified and reported on numerous planned new Fresh & Easy stores in Northern California this year. Below are links to those stories:

Editor's Note -We began our 'Northern California Market Region Special Report' in April of this Year. As part of the series we correctly reported (broke the news) that Tesco's Fresh & Easy Neighborhood Market would announce this summer that it planned to start opening its first stores in Northern California in early 2011. In our story we said the grocer would make the announcement by the end of July. Fresh & Easy made the announcement a couple weeks later in August. Our ongoing series offers readers a excellent primer on what will be United Kingdom-based Tesco's newest market - the Northern California region - which it plans to enter with its small-format Fresh & Easy Neighborhood Market fresh food and grocery chain early next year.

Friday, November 19, 2010

We've written extensively about Fresh & Easy Neighborhood Market's chronic use of its 25%-off (pictured above) and 20%-off deep-discount store coupons as a way to create and maintain sales in its 155 stores in California, Nevada and Arizona. [Click: here, here and here for a selection of those past stories.]

As a current example of that chronic use, the Tesco-owned grocer currently has three versions of the 25%-off and 20%-off store coupons in distribution - one good for $5-off purchases of $20 or more (expires on November 30); another good for $6-off purchases of $30 or more (good until November 22); and a third offering $10-off purchases of $50 or greater (expires on November 22). The coupons are available online, which means shoppers can download the discount vouchers and use one each time they shop at a Fresh & Easy store in November.

The thrust of our writing about the Fresh & Easy store coupons, which give customers a full 20%-25%-off their total purchase amount if they buy the minimum amount required to redeem the coupons, has been three-fold.

Price perception: First, we've suggested that by chronically using the store coupons - Fresh & Easy has used them regularly with only a couple slight pauses since November 2007 when its first stores opened - the grocer has established to its detriment a retail pricing policy and related shopper perception that says because Fresh & Easy nearly always has the coupons in circulation, the everyday prices at the stores are too high. But with the coupons the prices are low.

We believe on some level Fresh & Easy's senior management has learned this to be true because when it attempts to stop issuing the store coupons for more than a few weeks at a time, store sales drop considerably. Additionally, customers complain about the lack of coupons on Fresh & Easy Neighborhood Market's Facebook and Twitter sites, saying that without the store coupons being available they will be doing far less shopping at the stores.

Fresh & Easy's senior management has compounded this problem by refusing to accept manufacturers' cents-off coupons in the stores, saying publicly in its marketing communications that the reason it doesn't accept the coupons is because its everyday prices are already low.

This argument doesn't hold water though because if that were the case, then why would Fresh & Easy need to regularly issue the deep-discount store coupons, which offer a far-higher percentage discount than manufacturers' cents-off coupons do? The Fresh & Easy-issued store coupons are a discount off a shopper's entire purchase, while manufactures' coupons are a discount off a single item. Grocer's get reimbursed by the manufacturers for the item coupons, while the discount from Fresh & Easy's store coupons comes out of the grocer's profit margin, which leads to our second argument as to why the chronic use of the store coupons has become a trap for Tesco's Fresh & Easy Neighborhood Market.

Gross Margin: In October Tesco reported its Fresh & Easy chain has a negative-38% gross margin. To put that in perspective, most healthy grocers have a gross margin that's at least in the plus-20% level. In order for Fresh & Easy Neighborhood Market to break-even by the end of 2013, as Tesco says it will, the grocer has to get its gross margin up from the current negative-38% to something at least close to what a healthy grocer produces in order to make a profit. Doing so is a huge task for Tesco.

In our analysis, one of the key contributors, but far from the only one, to Fresh & Easy's negative- 38% gross margin is the chain's chronic use of the deep-discount store coupons, which as mentioned earlier reduce a shopper's total market basket of purchases by a whopping 20% if the customer buys the minimum dollar amount - the $30 minimum purchase to get the $6 off, for example. Even if a customer buys $60 worth of groceries and gets the $6-off, that's still a 10% bite out of the market basket - $54 instead of $60 for the hypothetical purchase.

Since the store coupons are in distribution nearly always, and since shoppers use the coupons so often, Fresh & Easy is taking constant hits to its margins simply by virtue of having established the store coupons as a regular feature of how it does business. (This goes hand-in-hand with having created the price-perception in the minds of customers, which we detailed above.)

A vulnerable promotional tool: Lastly, we've suggested that in addition to the two key factors outlined above, the chronic use of the deep-discount store coupons by Tesco's Fresh & Easy - rather than using them as an infrequent (once a quarter or so) promotional tool as is the industry norm - is such a simplistic form of promotion that it presents an opportunity for competitors in a given market, particularly big ones with high market share, to make a defensive move, accepting the Fresh & Easy coupons in their respective stores, therefore rendering what has become Fresh & Easy's primary promotional tool, the deep-discount coupons, a seriously blunted one.

Fry's did a handful of one-week promotions in 2009, in which it accepted the Fresh & Easy store coupons, along with those of all its other competitors, touting the move in its weekly advertising circular and in other forms of media advertising and promotion.

The direct or default target of Fry's in accepting the store coupons was Tesco's Fresh & Easy, since none of the other grocery chains in the market issue similar store coupons on a regular basis. (A couple do so on occasion.) In the promotion, Fry's also offered to round-up all manufacturers' cents-off coupons to a $1 value, regardless of the coupon's face value.

Fry's offered the deal a couple times early this year, once again. But beginning mid-year, the supermarket chain, which is the number two market share leader in metropolitan Phoenix, just a couple points behind Walmart Stores, went full-bore, offering to accept all competitors store coupons, along with offering the $1 value for all manufacturers' cents off coupons, nearly every week. Fry's has continued the promotion nearly every week, including at present, during the last half of 2010.

Since Fry's only accepted the store coupons of its competitors infrequently last year, the resulting loss of sales at the Fresh & Easy stores that can be attributed directly to the Fry's defensive move in 2009 wasn't all that significant or regular.

However, that's changed. Because Fry's has been taking its competitors' (which means primarily Fresh & Easy since it's the only grocer in the market regularly distributing such coupons) store coupons nearly every week since the middle of this year, numerous customers who normally shopped at Fresh & Easy because of the coupons have been and are now taking the deep-discount vouchers to Fry's, which has resulted in a significant blunting of what is Fresh & Easy Neighborhood Market's primary offensive promotional tool - the deep-discount store coupons.

We know this to be the case for a couple reasons. First, Fresh & Easy Buzz has talked to managers and grocery checkers at over 25 Fry's stores in metro Phoenix since the middle of this year. The store workers tell us their tills are overflowing with Fresh & Easy store coupons, which are being redeemed by shoppers who download the discount slips of paper from the Fresh & Easy site, print them out, but then use the coupons at a Fry's store instead of at a Fresh & Easy market.

Additionally, because of the regular acceptance of the Fresh & Easy store coupons at Fry's this year, Arizona's numerous grocery deal and coupon blogs have been recommending to their readers that instead of using the vouchers at a Fresh & Easy store, they instead use them at Fry's, in large part because Fry's runs its $1 value manufacturers' cents-off coupon promotion at the same time. Fry's lets shoppers first deduct the Fresh & Easy coupon from their total grocery purchase amount before then deducting the manufacturers' item coupons, which means even greater savings, which is what the Arizona blog sites are all about. [For some examples of what the numerous popular Arizona consumer coupon/grocery deal blogs are saying about using the Fresh & Easy store coupons at Fry's, take a look: here, here, here, here and here.]

Here's an example of the savings shoppers can get using both the Fresh & Easy store coupon and the $1 value manufacturers' coupons at Fry's: A customer buys $50 worth of groceries. She then uses the $10-off $50 Fresh & Easy coupon, bringing her grocery order to $40. She then can use her manufacturers' cents off coupons against the $40 total. Remember all of the coupons at Fry's are worth $1, regardless of their face value. Therefore, let's assume she has $10 worth of the single-item manufacturers' coupons, each worth $1 at Fry's. As a result, her original $50 purchase, reduced to $40 after using the Fresh & Easy $10 coupon, is now a mere $30, a whopping savings of $20.

Without a doubt the loss on profit for Fry's on these transactions is significant. Fry's eats the $10 discount from the Fresh & Easy coupon, plus the amount from each manufacturers' cents off coupon over the face value. For example, giving $1 off on a 50-cent item coupon results in a loss on the amount of 50% for Fry's. The manufacturer only reimburses the grocer for the face value amount of the coupon plus a small handling charge.

However, because Fry's is a close second to Walmart in market share in the region, and because Kroger wants to protect its turf, along with the fact that Fry's is a small (but important) piece of Kroger's overall revenue base, it's decided it can take the hit in order to protect and it hopes grow that market share, despite what will obviously be a negative effect on the Fry's bottom line. Think of it as Fry's version of Jujitsu applied to a competitors promotional program, in this case Fresh & Easy's store coupons, which to date has been its most important promotional tool in terms of generating sales, and therefore its most vulnerable one.

Additionally, the point of this analysis isn't how accepting the competitor store coupons will affect Fry's bottom line. Rather, it's to empirically demonstrate the trap Tesco's Fresh & Easy finds itself in, regardless if it knows it or not, in terms of the vulnerability of its chief promotional tool, the deep-discount store coupons.

Broader implications of Fresh & Easy's store coupon trap

For example, if Fry's can accept the Fresh & Easy store coupons in Arizona, so can Kroger-owned Ralphs, Safeway's Vons or Albertsons in Southern California.

Further, in Northern California, where Fresh & Easy plans to open its first batch of stores in early 2011, one or more competitors could decide to follow the Fry's model and as a preemptive strike against Tesco's Fresh & Easy Neighborhood Market announce a couple weeks before the first stores open - or even worse start accepting the coupons a couple weeks before the stores even open, doing an old fashion competitor pantry-loading scheme - that it will accept the Fresh & Easy store coupons in its stores for a month, or two, or three, for example. Doing so would likely significantly hurt sales, something no grocer particularly wants to happen when it's just entering a market for the first time.

One might suggest the fact Fry's is accepting the store coupons is a good thing for Fresh & Easy, since we argue the discount vouchers are a key contributor to its double-digit negative gross margin. But also recall we argue that without the coupons, sales at the Fresh & Easy stores drop like a ton of 10 pound Gold Medal Flour bags, which is why the grocer continues to issue them on a regular and even overlapping basis, as is the case this month. In other words, It's a store coupon "Catch-22" for Tesco's Fresh & Easy in our analysis: Can't live with the coupons, can't live without them.

If our analysis is wrong, then the simple thing would be for Fresh & Easy to stop issuing the store coupons, at least in the Arizona market. After all, if it's true the reason the grocery chain doesn't accept manufacturers' cents-off coupons is because its everyday prices are already low, which Fresh & Easy executives have said is the case, then the same argument should hold for not issuing its own discount coupons, which lower a shopper's total purchase amount (and Fresh & Easy's margin) far more than even a big stack of manufacturers' cents-off coupons do.

But that's far from being the case in everyday practice, as we've noted in Fresh & Easy Buzz for nearly three years. Additionally, the fact Fresh & Easy has three different versions of the store coupons in distribution this month is ample evidence the grocer needs the coupons in order to maintain sales at the present level. If not, it would use the coupons much more cautiously.

From a merchandising perspective, Fresh & Easy has created a serious price perception problem for itself in the minds of customers with the chronic use of the store coupons. Based on our research and analysis, many of the grocer's regular customers factor-in the discount from the coupon as the de rigueur price they should pay for their purchases at Fresh & Easy. Take the coupons away for any extended period of time and those shoppers will likely adjust that mental calculus, perceiving the non-coupon cost of shopping at Fresh & Easy to be too high, compared to some of its competitors. That's what experience has shown thus far, based on our research and analysis.

Added struggle in Arizona

Ironically, we don't think Fry's acceptance of the store coupons is directly aimed at Fresh & Easy, at least not from the perspective that Kroger thinks the Tesco-owned chain is a direct threat in metropolitan Phoenix. After all, Fresh & Easy isn't even among the top six-seven grocers in terms of market share in the region. But Fresh & Easy is owned by Tesco, which is the third-largest food and grocery retailer in the world. And that fact might just be good enough for Kroger Co. to want to make sure Tesco has a very difficult time gaining any sort of foothold in Arizona with Fresh & Easy, along with letting it know that attempting to do so will come at a significant cost.

Tesco's Fresh & Easy recently closed six stores in metropolitan Phoenix, leaving it with the current 28 units, down from 34. Additionally, the grocer plans to focus its new store openings in 2011 primarily in California, as we've previously reported. It will likely open a handful of new stores in Arizona next year.

Tesco's 28 Fresh & Easy stores in metro Phoenix have been struggling overall in terms of sales before the pressure from Fry's defensive store coupon acceptance move. The fact that Fry's is taking the Fresh & Easy store coupons during the crucial Thanksgiving holiday season - we're told it will continue to do so for Christmas as well - is exerting even more pressure on Fresh & Easy Neighborhood Market's Arizona operations.

And since metropolitan Phoenix is arguably the most competitive food and grocery retailing market in the U.S., or close to it, and it's only getting more competitive, the outlook for Tesco's Fresh & Easy in the region is a fairly poor one at present. The fact Fry's is blunting Fresh & Easy's most-popular promotional tool, its deep-discount store coupons, makes Tesco's struggle in the market an even more challenging one.

[Editor's Note: This is part one of a two-part analysis piece. In part two we will offer some ways in which Tesco's Fresh & Easy may be able to escape from the chronic store coupon trap it appears to have set for itself.]

Thursday, November 18, 2010

Tesco's Fresh & Easy Neighborhood Market has launched an in-store holiday food drive at its 155 fresh food and grocery markets in California, Nevada and Arizona. The chain-wide food drive is in partnership with Feeding America, which supplies local food banks in the three states and elsewhere in the U.S. with perishable and non-perishable food items.

Fresh & Easy store customers can donate canned and packaged foods in special bins located inside the stores through Christmas Eve, December 24th.

The packaged foods will be given to local Feeding America-affiliated food banks and charities.

Each Fresh & Easy store will also make a donation, according to Roberto Munoz, the grocery chain's director of neighborhood affairs.

"We are grateful to Fresh & Easy for launching this food drive in support of our network of food banks, especially at this time of year, when so many people are struggling to feed their families as the winter sets in and the holidays approach," says Vicki Escarra, president and CEO of Feeding America.

"It's important to support our neighbors through partnerships like we have with local food banks. We are happy to support organizations year-round that help those in need, and are excited to work with our customers to give back even more this holiday season," Munoz adds.

"Since opening, [in November 2007] Fresh & Easy has built long-term relationships with neighborhood food banks and charities through partnerships established every time a store opens. The food drive was a suggestion of Fresh & Easy store employees who felt customers should have the opportunity to give back through these partnerships. Between donations from customers and Fresh & Easy stores, more than $1,000,000 in food will be given to local food banks and charities to help fight hunger this holiday season," says Munoz.

Feeding America tells Fresh& Easy Buzz it's in need of donations from food and grocery industry companies and individuals this holiday season, as it's experiencing one of the biggest demands for assistance in its history. If you can help, you'll find contact information for Feeding America at the non-profit organization's website here.

Wednesday, November 17, 2010

There's generally something fundamentally wrong from a senior management and strategic policy perspective when a food and grocery chain like Southern California-based Smart & Final launches a major new venture, such as it did with its five-store SmartCo Foods launch into the Denver, Colorado market in June 2010, then pulls the plug on it less than five months later, which Smart & Final did on Monday, announcing its plans to close the five stores "due to disappointing sales that fell below the company’s expectations." See the November 15 announcement here. The first SmartCo Foods' store opened in Denver, on June 23, 2010. [See - Smart & Final to Open its New Format SmartCo Foods Stores in California and Arizona.]

There's no question the Denver-region SmartCo stores have been performing poorly. But the real question is why Smart & Final would invest the considerable financial and human resources it has to develop a new format - SmartCo Foods - open five stores in metro Denver, from June-August 2010, and then close all five of the stores less than five months later? After all, new formats take time to develop - at least longer than five months - don't they?

Also, who did the math - the top line and bottom line figures - at Smart & Final? The math that was signed-off on by the CEO. Did the company project break-even or even profit for the five Denver-area SmartCo Foods stores after just five months, for example?

Therefore, an obvious logical and rational conclusion would be that Smart & Final's CEO, George Golleher, and his team, including president Dave Hirz, no longer have confidence in the hybrid supermarket, warehouse store, farmers market-style SmartCo Foods format, right?

However, that doesn't appear to be the case.

Smart & Final opened a SmartCo Foods store today in the Twin Peaks shopping center in Lake Forrest, in Southern California, the same day the retailer began deep-discounting for closeout the products in the five metro Denver, Colorado stores, which it hopes to close by the end of the month.

But despite this practical reality, we have to question the strategic thinking at the top of any grocery chain that would announce the complete scrapping of a less than five-month old venture -SmartCo Foods/metro Denver - on Monday, and then follow that up two days later with the opening of a store in Southern California - the first SmartCo Foods unit in the region - under the same just-failed format.

But Smart & Final president Dave Hirz says the retailer is committed to the SmartCo Foods' format (just not in metro Denver we suspect), saying in the November 15, 2010 press release: "While we regret having to close these stores and the impact this will have on our Colorado employees and customers, we remain committed to the SmartCo Foods concept and will open stores under the SmartCo Foods banner in other markets where we believe the concept will be successful. The first of these will open later this week in Lake Forest, California."

It's not impossible a SmartCo Foods store could do well in Lake Forest, California, despite the fact Smart & Final has concluded that five of the same-format stores have failed to meet performance expectations after being open for less than five months in metro Denver, Colorado. But such "one off" circumstances are not what strategic thinking is made of.

In other words, if the SmartCo Foods' format is a flop in Denver, can it really succeed in Lake Forest or elsewhere in Southern California? As we said - maybe? There's always a maybe. But the point is, any analyst worth his or her salt must question the strategic thinking behind making such a decision to open the Lake Forest SmartCo Foods format store at all. Why not move on from the format after taking what will be a significant financial and reputational loss in Colorado?

But then the entire rush project by Smart & Final to open the five SmartCo Foods stores in metro Denver in a couple months, along with regularly spinning that they would be the first of 20 -to- 25 units in the market, and then closing all five stores after just 5 months, appears to be the strategic thinking of the same decision-makers who are now attempting to throw the Lake Forest SmartCo unit opened today against the wall and see if it will stick (succeed).

We're supportive of retailer risk-taking and new ventures, which is one reason why Fresh & Easy Buzz has been one of the few publications to pay close attention to and regularly write about Smart & Final's SmartCo Foods launch and six month experiment in Colorado. We also hope the Lake Forest, California SmartCo is a success.

But something about Smart & Final's SmartCo Foods' venture in Colorado and now in Southern California just smells fishy, and we mean fishy beyond the seafood department.

From a strategic perspective it appears to us Smart & Final's senior management has been and is flying by the seat of its pants with SmartCo Foods, which is sad because the SmartCo store-level employees and small corporate staff in metro Denver, such as the folks doing promotions and social media, were doing what in our observation was an excellent job.

Perhaps if there would have been some smarter strategic thinking at the top at Smart & Final, those Denver-area SmartCo Foods' employees would have had a little longer than five months to do the good work they've been doing.

El Segundo (Southern) California-based Fresh & Easy announced in a press release on Wednesday (November 10) that it's in the process of hiring workers for 12 stores that are set to open early next year in Northern California, saying the stores are among the first the grocer plans to open in the San Francisco Bay Area and Modesto, which is in nearby Stanislaus County, in the Northern Central Valley. Fresh & Easy added in the announcement it expects to hire more than 275 employees for the stores.

Fresh & Easy doesn't mention it in its press release, but the positions it's currently hiring for are store managers and team leaders (assistant managers), as we've previously reported. The job listings are on the grocer's website, along with being advertised on various online job boards.

If you compare the 12 stores listed at top announced on November 10 and the eight stores above (August 19 announcement), you'll see there's one store (in green) - 3rd Street & Carroll/San Francisco - missing on Fresh & Easy's November 10, 2010 list.

Additionally, there are five stores (highlighted in green at top) that have been added (in the Wednesday announcement) for early 2011 openings (since the August 19 announcement). Those five stores are:

In other words, the November 10 announcement by Fresh & Easy Neighborhood Market is the first official confirmation that it plans to open the five additional stores in early 2011.

We say "confirmation" rather than "announcement" because if you're a Fresh & Easy Buzz reader, you learned prior to Wednesday that Fresh & Easy Neighborhood Market planned to open those five additional Northern California Fresh & Easy markets in early 2011.

Regarding the Third Street & Carroll Avenue/San Francisco Fresh & Easy store not being included in the grocery chain's November 10 announcement, Wednesday's press release from Fresh & Easy focuses on the stores the grocer is currently hiring for rather than being a list of all stores it's planning to open in early 2011. Therefore, it's possible the grocer has already hired the manager and team leader for the store. For example, we are aware first-hand of at least two existing company employees who've already interviewed for the store manager and team leader positions.

According to our current information, Fresh & Easy still plans to open the store, which is at 5800 Third Street, in early 2011 - as early as mid-February but no later than April.

The Sunnyvale store isn't listed in the grocer's November 10 press release. However, based on the information we have a present, Fresh & Easy still plans to open the unit in early 2011. We define early 2011 as January-April.

Therefore, based on our reporting, the grocer is currently looking to open 14 Fresh & Easy stores in early 2011.

Early 2011 openings

In terms of the "early 2011" store openings, we've said often that opening months are fluid and dynamic at Tesco's Fresh & Easy, although our sources tell us they're becoming less so as 2010 comes to an end, which is why when you read over our past reports and stories you'll see we frequently mention that fact.

Right now, based on the best information we have (and remember it's fluid and dynamic), the first few of the 12 Fresh & Easy stores won't likely open until mid-February -to- early-March 2011.

Fresh & Easy started advertising for store managers for the original eight stores announced on August 19 not long after the announcement was made. The grocer started advertising for team leader (assistant manager) and other store-level positions recently, ahead of Wednesday's press release.

As we've been reporting since May, Tesco's Fresh & Easy Neighborhood Market has been acquiring new, future store locations in Northern California at a rapid pace. See the linked stories bulleted below for some of those new locations:

As Tesco's Fresh & Easy, which operates 155 stores in California, Nevada and Arizona, prepares for the holiday 2010 shopping season - Thanksgiving and Christmas are the two leading shopping holidays for U.S. grocers - and looks to early and mid-2011, a time when the focus of its new store opening action is in California, the name of it's theme song is obvious: 'California here we come, right back where we started from.' After all, the first batch of Fresh & Easy fresh food and grocery markets - where and when it started - opened in Southern California in November 2007.

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